Thursday, November 19, 2015

After the S&P 500 Index pullback on Thursday and Friday last week, the market's advance on Monday and Wednesday has taken the S&P back into positive territory for November. This is impressive given the 8% gain in October. With this month and a half recovery though, the market seems to be facing some technical headwinds.

Of particular interest is the fact the Onbalance Volume Indicator (OBV) has been trending lower this year. Even with the positive market returns the past six week, the OBV is not suggesting conviction on up market days. The OBV indicator measures buying and selling pressure as a cumulative indicator adding volume on up days and subtracting volume on down days. The OBV measures positive and negative volume flow and the trend of the indicator is what is important. A downward sloping trend indicates more volume on down market days versus up market days. As the below chart shows, the OBV indicator is firmly in a downtrend.

Also, as noted in a number of posts in the past, computer algorithms are having a greater influence on the market. These computer algorithms need to trade on specific patterns which are created by price points traced out by the patterns themselves. As the below weekly chart of the S&P 500 shows, one pattern that remains in play is the inverse head and shoulders pattern. The potential downside price target for this pattern is S&P 1,599.

As we noted in our post last week, the high level of the equity put/call ratio was suggestive of a market bounce which investors have enjoyed this week just as the elevated VIX at the beginning of September was a technical indication of a potential market recovery from the ultimate low reached in August. However, as can be seen in the below chart, the VIX has fallen back into the high teens and may indicate a market that is becoming a little too complacent. The OBV certainly is suggestive of a potentially skittish investor as more volume is trading on the down days versus the up days and the right shoulder of the H&S patterns is becoming more distinctive. The market's recovery this week has provided some short term positive support; however, this head and shoulder pattern above remains in play.

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